Is your firm doing business with North Korea?

North Korea sanctions evasion


North Korea is already the subject of stringent economic sanctions from the UN, the EU and numerous individual states. But in spite of this, the country has managed to continue its nuclear programme and keep its economy, though far from thriving, more or less afloat.


Much of the country’s income has come from trade with China, in particular from the sale of coal. China banned further imports in February, but according to a confidential UN report, North Korea can continue to rely on a “trade in prohibited goods,” which it disguises by means of “evasion techniques that are increasing in scale, scope and sophistication” and which “significantly negate” the impact of sanctions.


North Korea’s sanctions evasion relies on a network of agents, corporate entities and bank accounts that spread from Malaysia, Indonesia and Singapore to Africa and the Middle East. Front companies and apparently complicit banks in China are a key link in the chain, fuelling accusations that Beijing is covertly undermining sanctions it nominally supports.


Malaysia, to which North Korean citizens enjoyed visa free access until the murder of Kim Jong-nam earlier this year, has also been an important base for Pyongyang to conduct finance-related and procurement activities.


Cheap coal and third-rate radios


Illicit North Korean exports include coal, gold, and rare earth metals, as well as missile parts, radios and other military technology. Somewhat bizarrely, ‘government monuments’ are another significant product, according to a recent Foreign Policy article. For developing nations in Africa and Asia that can’t afford to buy from established suppliers—or are sanctioned themselves—North Korea offers an affordable alternative for resources and military tech (and potentially for multi-life-size statues of dictators too).


In August 2016, a North Korean ship sailing under a Cambodian flag was seized in Egypt with a cargo of thousands of tons of North-Korean explosives. Another line of business involves buying cheap electronics in China and adapting them into military grade comms equipment, which is sold to developing nations at a huge markup.


Laundering the profits


For these income streams to be of use, North Korea must disguise and move the proceeds. This is done in various ways. The country relies heavily on Chinese banks, which provide correspondent services with New York banks to give access to the US Dollar. Money is also moved in physical form as cash or gold bullion. Finally, the country uses its network of agents and front companies to gain access to financial services in other jurisdictions, which either fall for the disguise or are happy not to ask many questions.


According to Business Insider UK, such agents often take advantage of the shared language to disguise themselves as legitimate South Korean businesspeople. Red flags include addresses that refer to the ‘Korean Republic’ or ‘PY city’.


Unless you happen to be an official in charge of procurement for a developing nation, you’re unlikely to accidentally place an order with the North Korean government. But financial services firms operating in Asia Pacific or the developing word face a real risk of being use as conduits for North Korean money, and should adjust their onboarding and screening procedures accordingly.


[Editor’s Note: This article was originally posted on KYC360 in April 2017]


Share on email
Share on twitter
Share on linkedin